June 13, 2018

Biggest Myth In Options Trading

They then go on to explain that 70-80% of options expire worthless. They point out that professional traders, particularly options market makers, are nearly always net short options.

This concept shows a stunning lack of knowledge about options! Let me explain so you don’t fall prey to it.

First, their two arguments are correct. But their conclusion is wrong.

It is true that the vast majority of options expire worthless. The implication is that you should therefore sell options rather than buy because the vast majority of your trades will be profitable.

This is also true but doesn’t really address whether or not you will make money. Here’s the reality.

The profits and losses of shorts and longs have to be equal! If you were to short every option you would have mainly winning trades but your winners would generally be small and your losers would be bigger than your winners.

On the other hand, buyers of options generally have more losing trades than winners but the size of their winners are larger than the size of their losers.

The profit and loss of short and longs are symmetrical but, in the final analysis, equal.

Buying or selling options needs to be considered not that it is just short or long but what other edges you have in the market, such as direction or an opinion on the future value of implied volatility.

So how can you make money in options? Simple! Sign up for our exclusive membership programs at Options University.